By: Jonathan H. Freiberger This BLOG has frequently addressed issues related to a party’s standing, in many different contexts, to commence litigation. In prior BLOG articles we have explained that in order to prosecute a lawsuit, the plaintiff must have standing to do so. Thus, we have noted that“ tanding involves a determination of whether the party seeking relief has a sufficiently cognizable stake in the outcome so as to cast the dispute in a form traditionally capable of judicial resolution. Graziano,v. County of Albany , 3 N.Y.3d 475, 479 (2004) (citations, internal quotation marks and brackets omitted). Put another way, “ tanding to sue requires an interest in the claim at issue in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant's request.” Caprer v. Nussbaum , 36 A.D.3d 176, 182 (2 nd Dep’t 2006). Accordingly, the question of whether a plaintiff has standing is “is a threshold determination, resting in part on policy considerations, that a person should be allowed access to the courts to adjudicate the merits of a particular dispute that satisfies the other justiciability criteria.” Caprer , 36 A.D.3d at 182 (Citations omitted). “‘Injury-in-fact has become the touchstone’ and requires ‘an actual legal stake in the matter being adjudicated.’” Big Apple Consulting USA, Inc. v. Belmont Partners , LLC, 20 Misc. 3d 1144(A) (Sup. Ct. Nassau Co. 2008) ( quoting Soc. Of Plastics Indus. Inc. v. County of Suffolk , 77 N.Y.2d 761, 772 (1991)). The Carper Court noted that the “Court of Appeals has defined the standard by which standing is measured, explaining that a plaintiff, in order to have standing in a particular dispute, must demonstrate an injury in fact that falls within the relevant zone of interests sought to be protected by law”. Caprer , 36 A.D.3d at 183 ( citing Matter of Fritz v. Huntington Hosp. , 39 N.Y.2d 339, 346 (1976). On September 18, 2024, the Second Department decided Whitson’s Food Service, LLC v. A.R.E.B.A.-Casriel, Inc. , a case in which the defendant moved to dismiss based on standing. In 2021, Whitson’s Food Service Corp. (“Corp.”) entered into a contract with the defendant by which Corp. was to provide various food-related services. The contract provided that: This Agreement and the rights granted hereunder may not be assigned by either Party, whether by operation of law, merger, change of ownership or otherwise, without the prior written consent of the other Party, and any unauthorized assignment shall be void ab initio. Eight months after entering into the contract, Corp. merged with Whitson’s Food Services, LLC (“LLC”), the plaintiff in the action. Approximately one year later, LLC commenced an action for breach of contract and unjust enrichment based on the defendant’s failure to pay in excess of $400,000.00 due under the contract. The defendant moved to dismiss the complaint arguing, inter alia , that the plaintiff, LLC, was not a party to the contract and, therefore, lacked standing to commence the action. Similarly, the defendant argued that it had not consented to any assignment of Corp.’s contract rights to LLC. The Second Department affirmed the motion court’s denial of the defendant’s motion. The Second Department found that the defendant satisfied its burden of establishing lack of standing because “ was not a party to the contract and that the defendant did not provide express consent to any assignment of the contract.” (Citation omitted.) Nonetheless, issues of fact were determined to exist because “ raised a question of fact as to its standing, primarily through its submission of an affidavit of its chief financial officer, who attested that the merger was a mere change in corporate form that had no effect on the beneficial ownership, possession, control, or daily operations of the business.” (Citation omitted.) Thus, “ nder the circumstances, raised a question of fact as to whether the merger constituted an assignment that violated the nonassignment provision of the contract.” (Citations omitted.) The Court also addressed LLC’s unjust enrichment claim. In order to plead a claim for unjust enrichment the plaintiff must allege “that (1) the other party was enriched, (2) at that party's expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered.” Georgia Malone & Company, Inc. v. Rieder , 19 N.Y.3d 511, 516 (2012) (citations and internal quotation marks omitted); see also Bedford-Carp Construction, Inc. v. Brooklyn Union Gas Co ., 219 A.D.3d 1293, 1295 (2 nd Dep’t 2023) The theory of unjust enrichment lies as a quasi-contract claim and contemplates an obligation imposed by equity to prevent injustice, in the absence of an actual agreement between the parties.” Id. (citations internal quotation marks and brackets omitted). Claims of unjust enrichment are “rooted in the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another.” Id. (citations and internal quotation marks omitted). The Whitson’s Court noted that a “plaintiff may allege a cause of action to recover damages for unjust enrichment as an alternative to a cause of action alleging breach of contract.” (Citations and internal quotation marks omitted.) This can happen when the existence of a contract “is in dispute”. F&R Goldfish Corp. v. Furleiter , 210 A.D.3d 643, 646 (2 nd Dep’t 2022); see also Cheung v. Dolar Shop Restaurant Group, LLC , 229 A.D.3d 738, 740 (2 nd Dep’t 2024). Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Eds. Note: to find our BLOG articles related to standing, visit the “ Blog ” tile on our website and enter “standing” in the “search” box. Eds. Note: to find our BLOG articles related to unjust enrichment, visit the “ Blog ” tile on our website and enter “unjust enrichment” in the “search” box.

By: Jeffrey M. Haber In Murray v. Samsung Elecs. Am., Inc. , 2024 N.Y. Slip Op. 51257(U) (Sup. Ct. Monroe County Sept. 12, 2024) ( here ), the court was asked to consider the viability of claims for violations of General Business Law §§ 349 and 350, breach of contract, and breach of the warranty of merchantability. As discussed below, the motion court held that plaintiff failed to satisfy the elements of the claims asserted. In particular, the motion court held that plaintiff failed to allege facts showing that the statements claimed to be false were not likely to mislead a reasonable consumer acting reasonably under the circumstances as required under GBL §§ 349 or 350. The motion court also held that plaintiff’s breach of contract claim was deficient because she failed to allege contractual privity with defendant. Finally, the motion court held that plaintiff failed to allege any facts that would support a claim for the breach of implied warranty (of either fitness or merchantability). Summary of Allegations in the Complaint Plaintiff alleged that she purchased a Samsung Galaxy S22 Ultra smartphone in 2021 or 2022 from a cell phone carrier and/or consumer electronics store. She expected that the smartphone would come with a “charging block”; instead the smartphone only came with a charging cord. Plaintiff claimed that the only notice provided to consumers was a statement on the back of the smartphone's box stating: “Packaging Contains: Samsung Galaxy S22 Ultra, S Pen, Sim Card, Ejection Pin, USB-C to USB-C Cable, Quick Start Guide/Terms & Conditions.” The box in which the plaintiff’s smartphone was packaged for sale, however, also contained a disclaimer, in bolded lettering, stating: “Wall charger and headphones sold separately.…” Plaintiff alleged that without the charging block purchasers are unable to use the smartphone as intended, and the purchase of a charging block is required. Had plaintiff known that the S22 Ultra did not come with a charging block, she would not have paid the asking price or would not have purchased the smartphone. Plaintiff alleged violations of GBL §§ 349 and 350, breach of contract, and breach of implied warranty of merchantability/ fitness for a particular purpose. Defendant moved to dismiss. The motion court granted the motion. The GBL Claims To state a claim under GBL §§ 349 and 350, “a plaintiff must allege that a defendant has engaged in (1) consumer-oriented conduct, that is (2) materially misleading, and that (3) the plaintiff suffered injury as a result of the allegedly deceptive act or practice. A claim under these statutes does not lie when the plaintiff alleges only “a private contract dispute over policy coverage and the processing of a claim which is unique to the[] parties, not conduct which affects the consuming public at large.” Thus, a plaintiff claiming the benefit of either Section 349 or Section 350 “must charge conduct of the defendant that is consumer-oriented” or, stated differently, “demonstrate that the acts or practices have a broader impact on consumers at large.” Notably, the deceptive practice does not have to rise to “the level of common-law fraud to be actionable under section 349.” In fact, “ lthough General Business Law § 349 claims have been aptly characterized as similar to fraud claims, they are critically different.” For example, while reliance is an element of a fraud claim, it is not an element of a GBL § 349 claim. Nevertheless, a plaintiff must allege the existence of a materially misleading act or advertisement to state a cause of action under GBL §§ 349 and 350. The test for both a deceptive act or deceptive advertisement is whether the act or advertisement is “likely to mislead a reasonable consumer acting reasonably under the circumstances.” Whether a particular act or advertisement is materially misleading may be made by a reviewing court as a matter of law. In addition, a plaintiff must prove “actual” injury to recover under the statutes, though not necessarily pecuniary harm. And, the plaintiff must prove the deceptive act caused the injury. The motion court concluded, “as a matter of law, that the statements contained on the packaging box for the S22 Ultra purchased by plaintiff were not likely to mislead a reasonable consumer acting reasonably under the circumstances.” First, noted the motion court, “the box clearly identified the contents, stating that it contained: ‘Samsung Galaxy S22 Ultra, S Pen, Sim Card, Ejection Pin, USB-C to USB-C Cable, Quick Start Guide/Terms & Conditions.’” “Notably absent from the list of contents,” said the motion court, was “a wall charger (‘charging block’).” From this list, concluded the motion court, “ reasonable consumer acting reasonably would thus be aware that the purchase of the smartphone did not include a wall charger.” Second, said the motion court, “the packaging box specifically stated that the wall charger was not included. Thus, Samsung specifically disclaimed the inclusion of a wall charger.” Under New York law, “ disclaimer may not bar a General Business Law § 349 claim at the pleading stage unless it utterly refutes plaintiff’s allegations, and thus establishes a defense as a matter of law.” The motion court found that the disclaimer at issue – that no wall charger was included in the packaging – “eliminate any possibility that a consumer would be misled into believing a wall charger was included.” Since defendant did more than disclaim liability generally but, rather specifically disclaimed the allegedly deceptive conduct, “so as to eliminate any possibility that a reasonable consumer would be misled,” the motion court dismissed the GBL §§ 349 and 350 causes of action. The Breach of Contract Cause of Action The motion court held that the “breach of contract cause of action must be dismissed as the plaintiff failed to plead the existence of a valid contract and contractual privity between the plaintiff and the defendant.” The motion court found that “there no facts alleged in the complaint supporting the existence of a valid contract (implied or otherwise).” The motion court explained that plaintiff failed to allege mutual assent between her and defendant: “The essence of the plaintiff’s breach of contract claim is that the terms of the contract were that Samsung agreed to provide a wall charger. However, the documentary evidence (the photograph included by plaintiff in her complaint) establishes that Samsung specifically stated a wall charger was not included in the sale of the smartphone.” Notably, the motion court found that plaintiff failed to allege contractual privity with defendant: “Plaintiff alleges she purchased the smartphone from a vendor, not from Samsung directly and thus the complaint fails to establish contractual privity between the Samsung and the plaintiff.” Accordingly, the motion court dismissed the breach of contract cause of action. The Warranty of Merchantability Claim “The implied warranty of merchantability is a guarantee by the seller that its goods are fit for the intended purpose for which they are used and that they will pass in the trade without objection.” To establish that a product is defective for purposes of a breach of implied warranty of merchantability claim, a plaintiff must show that the product was not “reasonably fit for intended purpose,” an inquiry that “focuses on the expectations for the performance of the product when used in the customary, usual and reasonably foreseeable manners.” The motion court held that plaintiff “fail to allege any facts that would support a breach of implied warranty claim (of either fitness or merchantability).” For instance, the motion court noted that plaintiff failed “to allege an inability to charge the smartphone (as the plaintiff concede the smartphone included a charging cord allowing it to be charged through other methods).” Additionally, the motion court rejected “plaintiff’s allegation that Samsung’s smartphone was ‘not fit for the ordinary purpose for which it was intended and did not conform to the promises or affirmations of fact made on the packaging, container or label, because it was marketed as if it would be sold with the essential parts to render it functional.’” That allegation, said the motion court, was “specifically rebutted by the documentary evidence showing Samsung disclaimed inclusion of a wall charger but did include a charging cord allowing it to be charged through any compatible charging port.” The motion court also held that plaintiff “failed to allege that the alternative methods to charge the phone are unavailable to the standard consumer or unreasonable.” “Although the plaintiff prefers charging the smartphone with a charging block,” explained the motion court, “that is not the exclusive method of charging the phone.” “Absent this allegation,” concluded the motion court, “the smartphone cannot be said to be not fit for the ordinary purpose it was intended.” Finally, the motion court dismissed the implied warranty claim because there was “no privity of contract between Samsung.” As noted, “ laintiff asserted in the complaint she purchased the smartphone from a third party and was claiming only economic loss.” _______________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Koch v. Acker, Merrall & Condit Co. , 18 N.Y.3d 940, 941 (2012); Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 324 n.1 (2002). New York Univ. v Continental Ins. Co. , 87 N.Y.2d 308, 321 (1995) (internal quotation marks omitted). Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank , 85 N.Y.2d 20, 25 (1995). Boule v. Hutton , 328 F.3d 84, 94 (2d Cir. 2003) (citing Gaidon v. Guardian Life Ins. Co. , 94 N.Y.2d 330, 343 (1999)). Gaidon , 94 N.Y.2d at 343. Stutman v. Chemical Bank , 95 N.Y.2d 24, 29 (2000); Small v. Lorillard Tobacco Co. , 94 N.Y.2d 43, 55-56 (1999). See Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., Inc. , 37 N.Y.3d 169, 176 (2021); Andre Strishak & Assocs., P.C. v. Hewlett Packard Co. , 300 A.D.2d 608, 609 (2d Dept. 2002). Oswego , 85 N.Y.2d at 26. See also Andre Strishak , 300 A.D.2d at 609;  Himmelstein , 37 N.Y.3d at 178. Id. Stuntman , 95 N.Y.2d at 29; Oswego , 85 N.Y.2d at 26. Id. ; Oswego, 85 N.Y.2d at 26. Slip Op. at *2. Id. Id. Id. Id. Goshen , 98 N.Y.2d at 326;  Fink v. Time Warner Cable , 714 F.3d 739, 742 (2d Cir. 2013). Slip Op. at *2. Gaidon , 94 N.Y.2d at 345; Himmelstein , 37 N.Y.3d at 180. Slip Op. at *2. Id. at *2-*3. Id. at *3. Id. (citing Collyer v. LaVigne , 202 A.D.3d 1335 (3d Dept. 2022), lv. dismissed , 39 N.Y.3d 925 (2022)). Saratoga Spa & Bath v. Beeche Sys. Corp ., 230 A.D.2d 326, 330 (3d 1997),  lv. dismissed , 90 N.Y.2d 979 (1997) (citation omitted). Id . at 330; see U.C.C. 2—314(2)(c). Denny v. Ford Motor Co ., 87 N.Y.2d 248, 258-259 (1995). See also Wojcik v. Empire Forklift, Inc. , 14 A.D.3d 63 (3d Dept. 2004). Slip Op. at *3. Id. Id. Id. Id. Id. Id. Id. Id. (citing Ofsowitz v. Georgie Boy Mfg., Inc ., 231 A.D.2d 858, 859 (4th Dept. 1996)).

By Jonathan H. Freiberger Discovery (or disclosure) in litigation, which is governed in New York State practice by Article 31 of the CPLR , is the mechanism by which litigants obtain facts and information from other parties and non-parties to support their claims and/or defenses and otherwise prepare for trial. This BLOG has previously addressed discovery issues. See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> and the BLOG articles hyperlinked therein. CPLR 3101 provides that “ here shall be full disclosure of all matter material and necessary in the prosecution or defense of an action.” CPLR 3101(a). The Court of Appeals has interpreted the “material and necessary” requirement liberally to “require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity.” Allen v. Crowell-Collier Publ’g Co. , 21 N.Y.2d 403, 406 (1968). “The test is one of usefulness and reason.” Id. Thus, “if there is any possibility that the information is sought in good faith for possible use as evidence-in-chief or in rebuttal or for cross-examination, it should be considered evidence material . . . in the prosecution or defense and thus should be disclosed pursuant to CPLR 3101(a).” Lau v. Margaret E. Pescatore Parking, Inc. , 105 A.D.3d 594, 595 (1st Dept. 2013) ( quoting Allen , 21 N.Y.2d at 407) (internal quotation omitted). When a litigant fails to comply with discovery demands or discovery related court orders, the CPLR provides remedies. For example, CPLR 3124 provides that when a “person fails to respond to or comply with any request, notice, interrogatory, demand, question or order under this article, except a notice to admit under section 3123, the party seeking disclosure may move to compel compliance or a response.” Similarly, pursuant to CPLR 3126 , when a party or its representative refuses to obey a discovery order or “willfully” fails to produce information that the court finds “ought to have been disclosed,” the court may, inter alia , issue an order: (1) deeming issues related to the requested information resolved in favor of the party obtaining the order; (2) prohibiting the recalcitrant party from “supporting or opposing designated claims or defenses, from producing in evidence designated things or items of testimony … or from using certain witnesses”; or, (3) “striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or any part thereof, or rendering a judgment by default against the disobedient party.” “Willful failure” to comply with disclosure obligations “may be established by repeated failure to comply with court orders directing disclosure, including court orders issued at conferences.” Shah v. Oral Cancer Prevention Int’l, Inc. , 138 A.D.3d 722, 724 (2 nd Dep’t 2016) (Citations omitted); see also Nationstar Mort., LLC v. Jackson , 192 A.D.3d 813, 815 (2 nd Dep’t 2021). The extent of penalties issued under CPLR 3126 is “generally left to the court’s discretion.” Guardado v. K.B.G Commercial, Inc. , 209 A.D.3d 721, 722 (2 nd Dep’t 2022) (citations omitted). In addition, the New York Administrative Code provides guidance on the procedures to be followed prior to seeking court intervention to resolve discovery disputes. See, e.g., 22 NYCRR 202.20-f . Further, a particular judge’s individual part rules may also provide related (and important) guidance. On September 11, 2024, the Second Department, in Bayview Loan Servicing, LLC v. Evanson , a mortgage foreclosure action, addressed a motion to strike under CPLR 3126(3). There, the defendant served discovery demands on the plaintiff in a mortgage foreclosure action. The Plaintiff failed to respond. Three months later the defendant again served the demands; this time with a letter threatening to move to strike the lender’s complaint if responses were not served within ninety days. There was no indication that the defendant’s counsel made any effort to confer with the lender’s counsel to resolve the discovery dispute, nor did the defendant move to compel disclosure. Instead, the defendant moved to strike the lender’s complaint pursuant to CPLR 3126(3) because of the lender’s failure to respond to the discovery demands. The motion court denied the motion “on the ground that the defendant did not proceed ‘in conformity with’ 22 NYCRR 202.20-f.” The Second Department affirmed and, in so doing, stated: “To the maximum extent possible, discovery disputes should be resolved through informal procedures, such as conferences, as opposed to motion practice” (22 NYCRR 202.20-f ). All discovery motions must include “an affirmation that counsel has conferred with counsel for the opposing party in a good faith effort to resolve the issues raised by the motion” ( id. § 202.7 ; see Muchnik v Mendez Trucking, Inc. , 212 AD3d 640, 641 <2 nd dep’t 2023> nd dep’t 2023>). “The affirmation of the good faith effort to resolve the issues raised by the motion shall indicate the time, place and nature of the consultation and the issues discussed and any resolutions, or shall indicate good cause why no such conferral with counsel for opposing parties was held” (22 NYCRR 202.7 ; see Behar v Wiblishauser , 219 AD3d 793, 794 <2 nd dep’t 2023> nd dep’t 2023>). “Failure to provide an affirmation of good faith which substantively complies with 22 NYCRR 202.7(c) warrants denial of the motion” ( Behar v Wiblishauser , 219 AD3d at 794 ). Further, citing to 22 NYCRR 202.20-f , the Court noted that, absent “exigent circumstances,” prior to seeking the involvement of the court to resolve a discovery dispute, counsel must confer and make a good faith effort to resolve the dispute and, if no resolution is reached, any resulting discovery motion must be accompanied by an affirmation of good faith containing required specifics as to the steps taken to resolve the dispute. The Court found that the defendant failed to comply with 22 NYCRR 202.7 and 202.20-f(b) and that the defendant’s showing on the motion was wholly inadequate to warrant the extreme discovery sanction of striking the complaint.” (Citations omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber “Ensuring that potential whistleblowers can communicate directly with the Commission is a critical part of the SEC’s oversight mandate” On numerous occasions, we have written about the Securities and Exchange Commission’s (“SEC” or the “Commission”) whistleblower program and, in particular, the success of the program with respect to detecting and preventing violations of the federal securities laws. The success of the program depends, in large part, on the ability of would-be whistleblowers to have the freedom to report wrongdoing without fear of reprisal. Taking steps to impede a person, such as an employee or former employee, from sharing information with the SEC impairs this free flow of information to the Commission. To ensure the freedom to communicate, the SEC has cracked down on companies that use severance agreements, employment contracts, and other types of agreements to silence and discourage people from reporting wrongdoing to the Commission. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to combat illegal and fraudulent conduct on Wall Street and promote compliance with the federal securities and commodities laws. The Dodd-Frank Act contains whistleblower provisions that authorize the Commission to pay substantial cash rewards to whistleblowers that voluntarily provide the SEC with information about securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act. To fulfill the purpose of the Dodd-Frank Act, the Commission adopted Rule 21F-17, which provides in relevant part: (a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications. Rule 21F-17 applies to any policy or procedure, or agreement, such as confidentiality, severance, and non-disclosure agreements, that may impede a person from providing information to the SEC about a securities law violation. Rule 21F-17 became effective on August 12, 2011. Since its adoption, the SEC has vigorously enforced Rule 21F-17. Despite being effective for more than 13 years, many companies have ignored the mandate of Rule 21F-17. In this regard, they have used employment contracts, severance agreements and other types of agreements to silence and discourage people from reporting violations of the securities laws to the Commission. Recently the SEC announced that it had settled charges against numerous companies for violation of Section 21F. The first action was announced on September 4, 2024 (here). In that action, the SEC brought charges against three affiliated registrants, Commission-registered broker-dealer Nationwide Planning Associates, Inc. and investment adviser NPA Asset Management, LLC, and state-registered investment adviser Blue Point Strategic Wealth Management, LLC, for impeding brokerage customers and advisory clients from reporting securities law violations to the SEC. The firms agreed to pay combined civil penalties of $240,000 to settle the SEC’s charges. According to the SEC’s order (here), from May 2021 through February 2024, Nationwide, NPA, and Blue Point collectively asked 11 retail clients to sign confidentiality agreements in connection with payments made by the entities to the clients’ investment accounts. The payments were intended to compensate the clients for losses caused by the firms’ alleged breaches of federal or state securities laws. The SEC found that the agreements contained provisions that impeded clients from reporting potential securities law violations to the SEC by permitting communications only where the SEC first initiated an inquiry. As described in the order, some of the agreements further required the clients to represent that they had not reported the underlying dispute to the SEC or to another securities regulator and would forever refrain from such reporting. Commenting on the enforcement action, Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit, stated: “Pure and simple, investors need to be able to report complaints or evidence of wrongdoing to the SEC without impediment. We will continue to hold firms accountable for putting roadblocks between us and their investors.” The SEC claimed that Nationwide, NPA, and Blue Point each violated Rule 21F-17(a) under the Exchange Act. Without admitting or denying the SEC’s findings, Nationwide, NPA, and Blue Point each agreed to be censured and to cease and desist from violating the whistleblower protection rule. They further agreed to a combined penalty, which was apportioned according to their relative size and financial condition, with NPA agreeing to pay $160,000, Nationwide $70,000, and Blue Point $10,000. The second set of actions was announced on September 9, 2024 (here). In those actions, the SEC brought charges against seven public companies for using employment, separation, and other agreements that violated rules prohibiting actions to impede whistleblowers from reporting potential misconduct to the SEC. To settle the SEC’s charges, the companies agreed to pay more than $3 million combined in civil penalties. Each of the companies was charged with violating whistleblower protection Rule 21F-17(a). In settlement of the actions, each of the firms agreed not to violate Rule 21F in the future and has taken steps to remediate the violations, including making changes to the relevant agreements. _____________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Creola Kelly, Chief of the SEC’s Office of the Whistleblower (here). In April 2015, the SEC brought the first enforcement action for a violation of the whistleblower protection rule based on a company’s use of a restrictive confidentiality agreement. See In the Matter of KBR, Inc., Exchange Act Release No. 74619 (Apr. 1, 2015). This Blog wrote about that enforcement action here. Since 2015, the SEC has instituted numerous enforcement actions charging violations of the rule. This Blog has examined some of those enforcement actions here, here, here, here, and here. The SEC orders can be found: here, here, here, here, here, here, and here.

By: Jeffrey M. Haber In Seitz v. Marcum LLP , 2024 N.Y. Slip Op. 51141(U) (Sup. Ct., N.Y. County Aug. 30, 2024) ( here ), Justice Robert R. Reed of the New York County Commercial Division addressed the doctrine of in pari delicto , which “bars a party that has been injured as a result of its own intentional wrongdoing from recovering for those injuries from another party whose equal or lesser fault contributed to the loss.” The doctrine is available to a defendant as an affirmative defense that can be raised in any type of action. Seitz arose from defendant’s allegedly negligent services as auditor and accountant for now-bankrupt entities City Line Behavioral Healthcare, LLC, formerly known as Liberation Behavioral Health, LLC (“LBH”), and its subsidiary, Life of Purpose-Pennsylvania, LLC, formerly known as Liberation Way, LLC (“Liberation Way”) (collectively, the “Liberation companies”). Plaintiff, as trustee of the bankruptcy estates of the Liberation companies, asserted four claims against defendant for accounting malpractice, breach of fiduciary duty, breach of contract, and unjust enrichment. Defendant moved to dismiss the complaint pursuant to CPLR 3211 (a) (5) and (a) (7). As discussed below, Justice Reed granted the motion and dismissed the complaint. Background The Liberation companies operated three facilities in Pennsylvania that provided treatment for drug and alcohol addiction. Liberation Way was a single-member limited liability company owned and controlled by LBH, which was, in turn, managed by a five-person board of directors. From 2015, the year of its founding, the CEO, CFO, and COO and President of LBH allegedly began engaging in fraudulent schemes including: “(i) fraudulently billing patients and insurance companies for treatments that were not provided, not medically necessary or were substandard; (ii) paying for patients to fraudulently obtain high-end insurance policies and fraudulently billing the insurance companies under those policies; (iii) generating kickbacks by sending thousands of medically unnecessary urine tests from the Company’s patients to co-conspiring labs in Florida; (iv) housing clients at sober-living homes associated with the Company without an inpatient license; and (v) failing to comply with regulations and licensing requirements.” In addition, the Liberation companies allegedly “manipulated financial statements , including by overstating revenue collection figures.” In or about May 2016, the Liberation companies engaged defendant, Marcum LLP, to perform accounting and auditing services for them. In 2016, Independent Blue Cross (“IBC”), an insurance company that insured many of the Liberation companies’ patients, began conducting an audit of the Liberation companies’ claims and billing practices. Through the audit, IBC discovered the alleged fraud and other misconduct that the Liberation companies committed between July 2015 and late 2017. IBC’s audit was known to the Liberation companies’ officers, directors, and critical advisors, and legal counsel to the Liberation companies disclosed the audit to defendant by no later than March 31, 2017. In December 2016, non-party Fulcrum Equity Partners, Inc. (“Fulcrum”) offered to purchase the Liberation companies and entered into a period of negotiation and due diligence. Under the proposed transaction, certain members of LBH would sell their membership units in LBH to LBH Holdings, LLC (“LBH Holdings”), a company newly created to become the parent company for LBH, and its subsidiary, LBH Holdco Corp. (“LBH Holdco”), pursuant to a Unit Purchase and Contribution Agreement (“Purchase Agreement”), in exchange for millions of dollars and membership units in LBH Holdings. In the Purchase Agreement, the selling members of LBH represented “that the and its staff had always followed all applicable laws, that they had not engaged in activity in violation of Pennsylvania law governing rehabilitation facilities, and that they maintained all required records.” These representations and warranties induced LBH Holdings and LBH Holdco to enter into the Purchase Agreement. As a result of the transaction, LBH became a wholly owned subsidiary of LBH Holdings. In connection with this proposed transaction, defendant performed accounting services for the Liberation companies, including valuation, due diligence, and opening balance sheet corrections. However, in its April 2017 audit report and accounting work, defendant allegedly never investigated or considered the implications of the IBC audit. Fulcrum and non-party Vocap Partners ultimately acquired the Liberation companies on December 11, 2017, contributing $12 million in cash and $29.6 million in funds loaned from Oxford Finance LLC (“Oxford”) and another bank, to purchase 70% of LBH Holdings. The $29.6 million loan was secured primarily by LBH’s assets. The selling members of LBH maintained a 30% stake in LBH Holdings. After the Fulcrum transaction, Fulcrum selected new officers and directors to control and direct the Liberation companies , including a new CEO. In January 2018, defendant began its 2017 audit and accounting services for the Liberation companies. During the audit, defendant allegedly learned of a material overstatement of net accounts receivable that it had missed in its 2016 audit and accounting services for the Fulcrum transaction. In addition, in reviewing the companies’ legal bills, defendant allegedly became aware of a series of governmental investigations that placed them in jeopardy, such as an order from the Pennsylvania State Department of Drug and Alcohol Programs (“DDAP”) to cease patient intake at multiple locations due to problems discovered during its inspections, an investigation by the Pennsylvania Office of the Attorney General, and an order from the federal Drug Enforcement Agency regarding violations of federal regulations governing Narcotics Treatment Programs. Defendant also allegedly learned that the Liberation companies were in default of their Credit Agreement with Oxford, according to a notice of default received on July 6, 2018. When defendant issued its 2017 audit report on August 8, 2018, it allegedly conducted no investigation into the government subpoenas or letter inquiries and never revisited findings from the IBC audit or Oxford’s notice of default. Likewise, when defendant began its audit and accounting service for 2018 in January 2019, it allegedly did not investigate or address any of these issues. On March 25, 2019, the Pennsylvania Office of the Attorney General announced criminal charges against LBH and its former officers and directors. At or about that time, defendant informed LBH’s new CEO that the Liberation companies should no longer rely on its audited financial statements. Defendant continued to perform audit and accounting services, including in connection with the Attorney General’s investigation, until the Liberation companies declared bankruptcy on April 17, 2019. Defendant did not issue an audit report for 2018. The Liberation companies declared bankruptcy on or about April 17, 2019. Plaintiff was appointed the trustee of the bankruptcy estates of the Liberation companies. On April 16, 2021, plaintiff commenced the action by filing a summons with notice. Plaintiff filed a complaint on May 20, 2021, asserting four causes of action for accounting malpractice, breach of fiduciary duty, breach of contract, and unjust enrichment with respect to defendant’s audit and accounting services from 2016 to 2019. On June 18, 2021, defendant filed a motion to dismiss the complaint. Plaintiff opposed the motion. The Motion Court’s Ruling In its motion, defendant principally argued that the complaint should be dismissed under the in pari delicto doctrine. Relying on the Court of Appeals’ decision in Kirschner v. KPMG LLP , Justice Reed held that the doctrine barred plaintiff’s claims. The motion court found that plaintiff, as the trustee of the bankruptcy estates of the Liberation companies, stood in the shoes of the Liberation companies and had no greater rights than they would have if they had not filed for bankruptcy. This was significant since plaintiff alleged that LBH’s officers themselves engaged in fraud and other malfeasance, and those acts had to be imputed to LBH. Therefore, said the motion court, “defendant sufficiently demonstrate that, as a party in pari delicto , plaintiff barred from bringing its claims stemming from the wrongful acts of the Liberation companies’ directors and officers.” In granting defendants’ motion, the motion court rejected plaintiff’s argument that issues of fact prevented the court from applying the in pari delicto doctrine to the complaint. Noting that the Court of Appeals specifically held that “in pari delicto may be resolved on the pleadings … in an appropriate case,” the motion court found that plaintiff did “not point to any factual dispute that would preclude dismissal on the basis of th doctrine.” In fact, noted the motion court, the doctrine’s “applicability apparent on the face of pleadings.” As explained by defendant, to which the motion court agreed, “‘ here is not a single allegation in the Complaint which suggests that Marcum’s auditing services were negligent in any way other than in failing to detect the Company’s own fraud. And there is no allegation that the Company’s financial statements were inaccurate in any way other than as a result of the Company’s fraud.’” The motion court also rejected plaintiff’s argument that the “adverse interest” exception to the in pari delicto doctrine should apply, such that the wrongful actions of the company’s officers would not be imputed to LBH. Under the adverse interest exception, which is narrowly applied, “management misconduct will not be imputed to the corporation if the officer acted entirely in his own interest and adversely to the interest of the corporation.” To avail oneself of the exception, a plaintiff must show that “the agent … totally abandoned his principal’s interests and entirely for his own or another’s purposes.” “It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal.” Justice Reed held that the adverse exception did not apply because plaintiff failed to allege that the LBH “officers and directors ‘totally abandoned principal’s interests and … act entirely for own or another’s purposes.’” Examining the Fulcrum transaction, which formed the basis of plaintiff’s argument, Justice Reed found that “ he transaction would have benefited the companies through the infusion of $12 million from Fulcrum and Vocap and $29.6 million in loans from Oxford. That the loan was secured by LBH’s assets alone not render the transaction in ‘adverse interest’ to the Liberation companies.” “Indeed,” said the motion court, “the transaction may, at least before discovery of the officers’ fraudulent acts, have permitted them to ‘survive,’ ‘attract investors and customers and raise funds for corporate purposes’ for the time being.” In conclusion, Justice Reed, quoting from the Court of Appeals’ decision in Kirschner, held that “the complaint must be dismissed in its entirety under the doctrine of in pari delicto”: However, as the Court of Appeals also observed in Kirschner, “ fraud that by its nature will benefit the corporation is not ‘adverse’ to the corporation’s interests, even if it was actually motivated by the agent’s desire for personal gain” ( Kirschner at 467). “So long as the corporate wrongdoer’s fraudulent conduct enables the business to survive—to attract investors and customers and raise funds for corporate purposes—this test is not met” ( id. at 468). Moreover, “any harm from the discovery of the fraud—rather than from the fraud itself—does not bear on whether the adverse interest exception applies. The disclosure of corporate fraud nearly always injures the corporation” ( id. at 469). In addition, pertinent to this case, “the mere fact that a corporation is forced to file for bankruptcy does not determine whether its agents’ conduct was, at the time it was committed, adverse to the company” ( id. at 468). Takeaway The in pari delicto doctrine serves two salutary purposes. First, the doctrine deters illegal activity by denying judicial relief to an admitted wrongdoer. Second, it conserves judicial resources because it avoids entangling courts in disputes between wrongdoers. Notwithstanding, the doctrine will not bar an action when an agent totally abandons his/her principal’s interests and acts entirely for his/her own purposes or those of another ( i.e. , the agent’s acts are “totally” adverse to the principal). In Seitz , plaintiff was unable to persuade the motion court that the officers and directors of the Liberation companies acted solely for their benefit. As such, the motion court was compelled to dismiss the complaint. __________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. This Blog previously examined the in pari delicto doctrine here . Rosenbach v Diversified Grp., Inc. , 85 A.D.3d 569, 570 (1st Dept. 2011). Kirschner v. KPMG LLP , 15 N.Y.3d 446 (2010) (malpractice); Donovan v. Rothman , 302 A.D.2d 238 (1st Dept. 2003) (breach of contract), Gitlin v. Chirinkin , 121 A.D.3d 939 (2d Dept. 2014) (breach of contract, breach of fiduciary duty, unjust enrichment). Slip Op. at *1 (quoting the complaint). Id. (quoting the complaint). Id. (quoting the complaint). Id. (citing Mediators, Inc. v. Manney (In re Mediators, Inc.) , 105 F.3d 822, 826 (2d Cir 1997)). Id. See Stokoe v. Marcum & Kleigman LLP , 135 A.D.3d 645, 645 (1st Dept. 2016). Justice Reed distinguished Stokoe by noting that in Stokoe the defendants had failed to show fraudulent activity by the plaintiffs’ agent, whereas in the case before him, “plaintiff himself … pleaded the officers’ fraudulent activity.” Slip Op. at *2. Slip Op. at *2 (citing Kirschner , 15 N.Y.3d at 459, n.3). Id. Id. (quoting defendant’s reply memorandum). Symbol Tech., Inc. v. Deloitte & Touche, LLP , 69 A.D.3d 191, 197 (2d Dept. 2009). Kirschner , 15 N.Y.3d at 466. Id. Slip Op. at *3 (quoting Kirschner , N.Y.3d at 466). Id. Id. (quoting Kirschner , 15 N.Y.3d at 468). Id. at *3-*4. Id. at *3. Kirschner , 15 N.Y.3d at 464. Id. at 466.

By: Jeffrey M. Haber In Hydraulic IP Holdings, LLC v. Tan , 2024 N.Y. Slip Op. 32930(U) (Sup. Ct., N.Y. County Aug. 16, 2024 ( here ), the court was asked to hold certain successor entities liable for the unsatisfied judgment (“Judgment”) issued by the motion court in plaintiff’s favor and against non-party Grace Apparel LLC (“Grace”). As discussed below, the motion court declined to grant summary judgment in either party’s favor, holding there were issues of fact as to whether the Successor Entities were liable under the de facto merger doctrine. The facts in Hydraulic IP Holdings are simple. Grace failed to pay the Judgment, ceased its operations as a wholesale and private-label garment manufacturer and, according to plaintiff, continued to operate the wholesale and private-label garment manufacturing business in the names of one or both of the Successor Entities, which had the same ownership, address, employees, and assets, and which assumed Grace’s liabilities. “The de facto merger doctrine creates an exception to the general principle that an acquiring corporation does not become responsible thereby for the pre-existing liabilities of the acquired corporation.” “A de facto merger occurs where one corporation is absorbed by another, but without compliance with the statutory requirements for a merger.” Courts consider the following factors to determine whether the de facto merger doctrine applies: (1) continuity of ownership; (2) cessation of ordinary business and dissolution of the acquired corporation; (3) assumption by the successor of the liabilities for the continuation of the business of the acquired corporation; and (4) continuity of management, personnel, physical location, assets, and general business operation. “Not all of these elements are necessary to find a de facto merger.” Satisfaction of as few as two factors can suffice. “The question of whether a de facto merger exists is ‘analyzed in a flexible manner that disregards mere questions of form and asks whether, in substance, ‘it was the intent of to absorb and continue the operation of .’” The de facto merger doctrine is rooted in equity and exists “to ensure that a source remains to pay for the victim’s injuries.” As noted, the motion court found that there were questions of fact regarding the application of the de facto merger doctrine. Continuity of Ownership Continuity of ownership “exists where the shareholders of the predecessor corporation become direct or indirect shareholders of the successor corporation as the result of the successor’s purchase of the predecessor’s assets.” The motion court found that there was a question of fact as to this prong of the analysis due to the continuous ownership by Grace’s owners and the defendant GBrands but only one owner, defendant Tan, as the owner of defendant CC Apparel. The motion court also found that there was an issue of fact as to whether there was a transfer of assets sufficient to trigger the de facto merger analysis. The motion court further found that the use of the same logo by Grace and GBrands also created an issue of fact. Dissolution It is well settled that for purposes of the de facto merger analysis, the predecessor company is not required to have been legally dissolved, if it “is shorn of its assets and has become, in essence, a shell.” The motion court found an issue of fact as to whether Grace had been legally dissolved – that is, “whether Grace … maintains its own corporate records and bank accounts,” has “conducted business and has vacated its leased space.” The motion court explained that the “proffered testimony inconsistent and best suited for a finder of fact.” Assumption of Liabilities for Continuation of Business The motion court found that there was a question of fact as to this prong of the de facto merger analysis, noting “ hile defendants contend that no agreements were made between Grace and the successor entities, the payment of Grace’s debt by CC creates a question of fact, notwithstanding the remaining contentions of the defendants.” Continuity of Assets, Management and/or Business Operations As to this prong of the analysis, the motion court held that there was a question of fact preventing the grant of summary judgment. The motion court explained that notwithstanding the existence of certain undisputed facts, because defendants claimed that plaintiff failed to satisfy the other prongs of the analysis, “the remaining factors insufficient to satisfy plaintiff’s burden.” ________________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. The successor entities are: GBrands Holding, LLC (“GBrands”) and CC Apparel, LLC (“CC Apparel” and collectively with GBrands, the “Successor Entities”). Fitzgerald v. Fahnestock & Co. , 286 A.D.2d 573, 574 (1st Dept. 2001). Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc. , 775 F.3d 38, 42 (2d Cir. 1985). Fitzgerald , 286 A.D.2d at 574. See also Highland Crusader Offshore Partners, L.P. v. Targeted Delivery Techs. Holdings, Ltd. , 184 A.D.3d 116, 126 (1st Dept. 2020). Id. at 574-575. See , e.g. , Beck v. Roper Whitney, Inc. , 190 F. Supp. 2d 525 (S.D.N.Y. 2001); State of N.Y. v. N. Storonske Cooperage Co., Inc. , 174 B.R. 366 (N.D.N.Y. 1994). Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 176 (1st Dept. 2013) (quoting Nettis v. Levitt , 241 F.3d 186, 194 (2d Cir. 2001), overruled on other grounds , Slayton v. American Exp. Co. , 460 F.3d 215 (2d Cir. 2006)). Matter of New York City Asbestos Litig. , 15 A.D.3d 254, 258 (1st Dept. 2005). Id. at 256. Slip Op. at *3. Id. Id. at *3-*4. Fitzgerald , 286 A.D.2d at 575. Slip Op. at *4. Id. Id. at *5. Id. at *6.

By: Jeffrey M. Haber Often, in the pre-action investigation of a client’s claims, it becomes evident that discovery would materially aid the client in framing his/her complaint or in learning the identities of the persons against whom the complaint should be brought. Obtaining pre-action discovery from the court, however, is not easy. As discussed below, the plaintiff must demonstrate the existence of a meritorious cause of action against the proposed defendant and the materiality and necessity of obtaining the information. Under Section 3102(c) of the CPLR, a plaintiff can obtain discovery “before an action is commenced … to preserve information” or “to aid in bringing an action ….” However, such discovery can be secured only by court order. Importantly, “while pre-action disclosure may be appropriate to preserve evidence or to identify potential defendants, it may not be used to ascertain whether a prospective plaintiff has a cause of action worth pursuing.” In other words, a would-be plaintiff cannot use Section 3102(c) to fish for a cause of action.  New York courts have explained that the foregoing “limitation” on the use of pre-action disclosure is “‘designed to prevent the initiation of troublesome and expensive procedures, based upon a mere suspicion, which may annoy and intrude upon an innocent party.’”   However, where “the facts alleged state a cause of action, the protection of a party’s affairs is no longer the primary consideration and an examination to determine the identities of the parties and what form or forms the action should take is appropriate.” Thus, “ re-action discovery is not permissible as a fishing expedition to ascertain whether a cause of action exists and is only available where a petitioner demonstrates that he or she has a meritorious cause of action and that the information sought is material and necessary to the actionable wrong.” The burden is on the petitioner to present “facts fairly indicating a cause of action against the adverse party.” Recently, this Blog examined Khorassani v. FINRA , No. 153819/2023, 2023 WL 4029701 (Sup. Ct., N.Y. County June 15, 2023), aff’d , 223 A.D.3d 589 (1st Dept. 2024) ( here ), a case in which the Appellate Division, First Department affirmed the denial of a request for pre-action discovery. Khorassani involved alleged fraud in connection with the merger of Torchlight Energy Resources (“Torchlight”) and Meta Materials, Inc. (“Meta Materials” or “MMAT”). After the merger, Meta Materials traded on the NASDAQ under the ticker symbol “MMAT”. In connection with the merger, Meta Materials issued a special dividend in the form of Series A Preferred shares (“MMTLP”) to Torchlight stockholders before the merger. MMLTP shares were not intended to be traded on any public exchange and were only intended to be a dividend placeholder for shareholders who owned Torchlight shares prior to the merger. In October 2021, the MMTLP shares were listed on the Over-The-Counter Market (“OTC Market”) with the assistance of an unidentified securities broker. Thereafter, unidentified brokers and market makers began trading shares of MMTLP on the open market. In July 2022, the company’s board of directors voted to spin off Torchlight’s assets into a new company called Next Bridge Hydrocarbons, Inc. (“Next Bridge”). In connection with the transaction, MMAT filed a Form S-1 Registration Statement (the “Registration Statement”) with the Securities and Exchange Commission (“SEC”) to register the issuance of stock in Next Bridge. Shortly after the Registration Statement became effective, short interest in MMTLP shares grew. By early December 2022, the volume of short sales exceeded the volume of stock that was not shorted by traders. As a result, on December 9, 2022, FINRA halted trading of MMTLP shares. FINRA’s halt in trading resulted in the failure of unknown and unidentified brokers to settle their short positions. As a result, the petitioner claimed that he was harmed, in addition to the Company’s other retail investors. The petitioner sought the “Blue Sheets” maintained by FINRA to allow him to ascertain the names, addresses, and basis of liability of the unknown brokers and market makers to frame his claims, which the petitioner said he intended to bring against the unknown and unidentified brokers and market makers for spoofing, naked short selling, market manipulation, and fraud. The motion court denied the petition, holding that the petitioner (a) was using CPLR § 3102 for purposes other than ascertaining the identity of the defendants, and (b) failed to assert a meritorious cause of action for fraud. The motion court found that the allegations and arguments in the petition were speculative and conclusory and, as a result, concluded that the petition was an improper fishing expedition. On appeal, the First Department affirmed, holding that the petitioner’s allegations were “conclusory” and fell “far short of the showing necessary to obtain pre-action disclosure.” In other words, the Court found that the petitioner failed to state a meritorious cause of action for fraud. In Steamroller, LLC v. OTC Mkts. Group, Inc. , 2024 N.Y. Slip Op. 32891(U) (Sup. Ct., N.Y. County Aug. 20, 2024 ( here ), the court was faced with “virtually” the same request for “relief as petitioner” in Khorassani ( i.e. , “the pre-action disclosure of the identities of the brokers who traded in MMTLP shares”). Relying on Khorassani and finding the case to be dispositive, the motion court denied the motion. Steamroller was brought by an MMTLP shareholder. Petitioner sought the disclosure of the identities of the individuals who or the entities that submitted a Form 211 to FINRA for the MMTLP shares to be listed for trading on the OTC Market. Petitioner claimed that the relief requested was necessary so that he could name the brokers and marker makers responsible for the fraudulent information allegedly used to list MMTLP on the OTC Markets. The motion court held that the petition “suffer from the same infirmities as the petition in Khorassani .” The motion court found that “ etitioner failed to identify any material misrepresentation by the broker or brokers who listed MMTLP for trading on which petitioner justifiably relied in purchasing shares of the security.” The motion court explained that “petitioner specifically claim that it relied on public disclosures…, the shareholders of which were to receive MMTLP shares upon Torchlight’s merger with Meta Materials, Inc.” “That disclosure,” said the motion court, “stated that MMTLP ‘will not be listed or traded on any exchange’ and ‘ o market is expected to develop for in the foreseeable future and holders of may not be able to find a buyer and sell their shares if they desired to do so.’” Thus, “based on petitioner’s own allegations,” concluded the motion court, “not only did petitioner not rely on any misrepresentation by the unidentified brokers, but it could also not have justifiably relied on Torchlight’s public disclosure because it does not state that MMTLP would or could not be traded on an unsolicited basis in the over-the-counter market.” “Indeed,” noted the motion court, “by stating that it might be difficult for holders of MMTLP to find buyers for their shares should they desire to sell them, it implicitly recognized that the shares might be bought and sold.” The motion court also held that petitioner failed to plead fraud with particularity, finding that petitioner failed to provide the “how” and “why” of the claimed fraud, and failed to allege any damages resulting from a misrepresentation by the broker or brokers and petitioner’s reliance thereon. _____________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. CPLR 3102(c) (“Before an action is commenced, disclosure to aid in bringing an action, to preserve information or to aid in arbitration, may be obtained, but only by court order.”). Id. Uddin v. New York City Tr. Auth. , 27 A.D.3d 265, 266 (1st Dept. 2006). Matter of Stewart v. New York City Transit Auth. , 12 A.D.2d 939, 940 (2d Dept. 1985) (citation omitted). Id. (citation and internal quotation marks omitted). Bishop v. Stevenson Commons Assocs., L.P. , 74 A.D.3d 640, 641 (1st Dept. 2010) (citations omitted). Matter of Schenley Indus. v. Allen , 25 A.D.2d 742, 743 (1st Dept. 1966). In addition Khorassani , this Blog examined applications for pre-action discovery under CPLR 3102,  here  and  here .  Slip Op. at *1. Id. Form 211 is an application to initiate or resume quotations on an exchange of a non-exchange listed security. Rule 15c2-11(b) of the Securities Exchange Act of 1934 and FINRA Rule 6432 govern the information that must included in the Form 211. Slip Op. at *2. Id. Id. Id. (citation to court record omitted). Id. at *2-*3. Id. at *3. Id.

By: Jeffrey M. Haber In DirecTV, LLC v. Nexstar Broadcasting, Inc. , 2024 N.Y. Slip Op. 04225 (1st Dept. Aug. 15, 2024) ( here ), the Appellate Division, First Department considered the viability of a fraudulent inducement claim and whether the plaintiff satisfied the elements of the claim. As discussed below, the Court held that the motion court “should have granted summary judgment in plaintiff’s favor on” this claim. DirecTV arose out of a retransmission consent agreement (“Agreement”) between DirecTV and Nexstar Broadcasting, Inc., whereby DirecTV would retransmit television signals of numerous television broadcast stations (“Stations”) owned by Nexstar for a three-year term, with an option to renew for a fourth year, and pay fees to Nexstar to do so. The Agreement was a renewal of a previous retransmission consent agreement between DirecTV, Nexstar, and two nonparties. During the negotiations leading up to the Agreement, the parties agreed that DirecTV would pay an “Unlaunched Station Fee” for station WHAG, then an NBC affiliate. Under the Unlaunched Station Fee provision, DirecTV was not required to carry WHAG, but agreed to consider doing so in “good faith” and to pay license fees for WHAG based on a fixed number of subscribers. DirecTV maintained that it only agreed to include the Unlaunched Station Fee Provision in the Agreement because of Nexstar’s repeated assurances that WHAG was an NBC-affiliated station. On June 30, 2016, WHAG lost its NBC affiliation and was not affiliated with any Big-6 Network after that date. Discovery showed that Nexstar first learned NBC would not extend the affiliation agreement for WHAG at least one year before the term expired. NBC did not want to extend or renew WHAG’s affiliation because NBC owned its own station in the Washington, D.C. market and wanted to eliminate duplicate affiliates operating in the same market. On January 30, 2017, DirecTV exercised its option to extend the term of the Agreement to a fourth year. On July 1, 2017, Nexstar changed WHAG’s call letters to WDVM. In 2018, DirecTV was informed that WHAG had lost its NBC affiliation. On June 26, 2019, DirecTV commenced the action, asserting causes of action for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, and a judgment declaring that DirecTV had no obligation to pay the Unlaunched Station Fee after WHAG lost its Network affiliation and that Nexstar is not entitled to retain the Overpayment or continue receiving the Unlaunched Station Fee. DirecTV amended its complaint to plead a cause of action for fraudulent inducement based on Nexstar’s fraudulent misrepresentations or omissions with respect to WHAG. Nexstar alleged two counterclaims in its amended answer for breach of contract predicated on DirecTV’s failure to pay the Unlaunched Station Fees and for a judgment declaring that DirecTV has no claim to the return of the Overpayment. DirecTV moved for summary judgment on its first cause of action for fraudulent inducement , the second cause of action for breach of contract, and the fourth cause of action for a declaratory judgment. DirecTV also moved for summary judgment dismissing Nexstar’s counterclaims. Nexstar also moved for summary judgment on its counterclaims and for summary judgment dismissing the amended complaint. DIRECTV’s First Cause of Action for Fraudulent Inducement 1.  Material Misrepresentation or Omission DirecTV alleged that Nexstar failed to disclose a material fact, namely WHAG’s loss of its NBC affiliation. The motion court found that any misrepresentation or omission as to station affiliation was material based on the terms of the Agreement. In that regard, the motion court cited to Section 7 of the Agreement, which stated that the “Stations’ affiliations as identified on Exhibit A are the essence of this Agreement.” Accordingly, the motion court found that Nexstar failed to raise an issue of fact as to materiality. 2.  The Duty to Disclose DirecTV maintained that Nexstar had a duty to disclose that WHAG would lose its NBC affiliation on two grounds. First, DirecTV characterized Nexstar’s repeated flaunting of WHAG’s NBC affiliation as an actionable half-truth, and that Nexstar had a duty to disclose the full facts of that affiliation. Second, DirecTV contended that Nexstar’s possession of superior knowledge regarding WHAG’s NBC affiliation triggered a duty to disclose. Nexstar argued that it had no duty of disclosure under either the special facts doctrine or the misleading partial disclosure doctrine. The motion court found that Nexstar had a duty to disclose based on a misleading partial disclosure. The motion court found that Nexstar represented that WHAG was an NBC affiliate but withheld the fact that the affiliation with NBC would terminate on June 30, 2016, and would not be renewed. The motion court noted that despite Nexstar’s hope that NBC would reconsider its decision to end its affiliation with WHAG, the NBC Agreement definitively stated that Nexstar and NBC agreed the affiliation would not be extended, and Nexstar was aware of this fact. The motion court held that Nexstar never disclosed this fact even though it repeatedly represented that WHAG was an NBC affiliate in a top market. This representation, said the motion court, could conceivably give rise to a false impression that WHAG would remain an NBC affiliate throughout the Agreement’s term. Moreover, the motion court held that the special facts doctrine was applicable, as information about WHAG was material to the transaction, and the end date for WHAG’s affiliation was not information that was easily or readily ascertainable with reasonable diligence. The motion court found that information pertaining to the expiration date on the NBC Agreement was within Nexstar’s superior knowledge, and such information could not have been obtained from the publicly filed documents. 3.  Scienter DirecTV asserted that Nexstar intentionally omitted the fact that WHAG was losing its NBC affiliation to induce DirecTV to agree to the Unlaunched Station Fee. Nexstar argued that DirecTV could not demonstrate a fraudulent intent to deceive because the NBC Agreement contained a provision prohibiting its disclosure and because Nexstar had no notice that the duration of WHAG’s affiliation was important to DirecTV. The motion court found that DirecTV’s proof on this element fell short of the clear and convincing evidence standard. The motion court found that deposition testimony had shown that Nexstar did not feel it was required to disclose that WHAG would no longer be affiliated with NBC after June 2016. At the same time, said the motion court, Nexstar did not demonstrate its entitlement to summary judgment. The motion court pointed to Section 7 of the Agreement, which provided that the essence of the Agreement was the Stations’ affiliations – language that Nexstar had agreed to include in the Agreement. Thus, held the motion court, it could not be said that Nexstar was unaware that WHAG’s NBC affiliation was important to DirecTV. Nexstar’s failure to disclose when WHAG’s NBC affiliation would end, concluded the motion court, gave rise to a reasonable inference of an intent to defraud. 4.  Justifiable Reliance The motion court held that triable issues of fact existed as to the justifiable reliance element. First, said the motion court, it was unclear whether DIRECTV could have learned of the expiration date through the exercise of ordinary diligence. Contrary to Nexstar’s contention, said the motion court, Nexstar’s 2014 Form 10-k did not publicly disclose the identity of which of its stations would lose its affiliation with NBC in June 2016. Also, noted the motion court, Nexstar admitted that the expiration dates were redacted on the affiliation agreements filed with the FCC. The motion court explained that NBC would not have disclosed when WHAG’s affiliation with it would have ended. Nor was it clear, said the motion court, that had DIRECTV directly asked, Nexstar would have disclosed the termination date. Thus, concluded the motion court, the exercise of ordinary diligence would not have disclosed that fact. DirectTV’s Second Cause of Action and Nexstar’s First Counterclaim for Breach of Contract In its second cause of action, DirecTV alleged that Nexstar breached the Agreement by collecting the Overpayment to which it was not entitled; failing to inform DirectTV that WHAG had lost its Network affiliation and had changed its call letters to WVDM; withholding the Overpayment; and demanding additional amounts for the Unlaunched License Fee. In its first counterclaim, Nexstar alleged that DirecTV breached the Agreement by failing to pay Unlaunched Station Fees owed to Nexstar. Reading the Agreement as a whole, the motion court concluded that the parties contemplated charging license fees only for those Stations that were affiliated with a Network or with CW or MNT, and that the Unlaunched Station Fee provision did not require DirecTV to pay license fees for an unaffiliated, independent WHAG. The motion court found support in Section 7 of the Agreement, which provided that a Station that changed network affiliations would be subject to license fees based on its new network affiliation. The motion court explained that Section 7 did not call for payment of license fees for Stations that lost their network affiliations during the term of the Agreement. The motion court noted that WHAG was an NBC affiliate when the Agreement was executed, and its term as an NBC affiliate ended on June 30, 2016. As such, WHAG was not affiliated with a Network, CW or MNT as of July 1, 2016. Thus, concluded the motion court, the Agreement did not require DirecTV to pay the Unlaunched Station Fee after July 1, 2016. Accordingly, the motion court denied Nexstar’s motion for summary judgment on its counterclaims and summary judgment dismissing the complaint, granted DirecTV’s motion for summary judgment on its breach of contract cause of action and summary judgment dismissing the counterclaims, and denied DirecTV’s motion for summary judgment on its cause of action for fraudulent inducement . The First Department’s Decision On appeal, the First Department unanimously modified the motion court’s order to grant DirecTV’s motion for summary judgment on its fraudulent inducement cause of action and Nexstar’s motion for summary judgment dismissing DirecTV’s causes of action for unjust enrichment and breach of the implied covenant of good faith and fair dealing, and otherwise affirmed the order. Regarding the breach of contract claims, the Court held that the motion “properly granted summary judgment to plaintiff on its breach of contract claim and denied summary judgment to defendant on its breach of contract counterclaim based on a straightforward interpretation of the unambiguous terms of the parties’ agreement.” The Court found that the motion court “simply interpreted the contract — as it must — in accordance with the document as an integrated whole.” Regarding DirecTV’s fraudulent inducement cause of action, the Court held that the fraud claim and breach of contract claims were not duplicative, noting that the fraudulent inducement cause of action “could provide a separate basis for recovery of Unlaunched Station Fees.” The Court found that the damages sought by the fraudulent inducement claim did not overlap with the breach of contract claim: The fraudulent inducement cause of action alleges that the Unlaunched Station Fee Provision was fraudulently induced and seeks all Unlaunched Station Fees that plaintiff made to defendant throughout the entire agreement, as well as attorneys' fees and punitive damages . The breach of contract claim, by contrast, seeks only the Unlaunched Station Fee payments that plaintiff made after WHAG lost its NBC affiliation. The Court held that the motion court “should have granted summary judgment in plaintiff’s favor on its fraudulent inducement cause of action.” The Court found that DirecTv adequately alleged scienter and justifiable reliance, noting that there was “simply no issue of fact as to either defendant’s intent to defraud or plaintiff’s justifiable reliance on the material misrepresentation.” The Court found that “there was unrebutted testimony from two NBC employees who testified that NBC advised defendant that there would be no further extensions to WHAG’s NBC affiliation beyond its June 30, 2016 termination, and that NBC never suggested to defendant that it might reconsider this decision.” “Thus,” concluded the Court, “defendant knew that the termination of the NBC affiliation was a fait accompli and intentionally concealed this information from plaintiff.” Further, the Court held that DirecTV reasonably relied on Nexstar’s representations about WHAG becoming an NBC affiliate. The Court explained that defendant’s 2014 Form 10-K, while publicly filed on February 27, 2015 and available to plaintiff at the time the 2015 agreement was being negotiated, did not identify the specific stations that would lose their NBC affiliations. Rather, defendant misrepresented in these documents that defendant expected the network affiliations of its stations to be renewed. As plaintiff did not have access to the relevant information, it reasonably relied on the fraudulent representations of defendant to its detriment. ___________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Slip Op at *2. DirecTV had overpaid a non-carriage fee, which was calculated from the date that WHAG lost its Network affiliation to August 2018 (“Overpayment”). Plaintiff alleged that Nexstar represented WHAG was an NBC-affiliated Station on multiple occasions; the representations were materially incomplete or were misleading partial disclosures, as Nexstar was aware WHAG would lose its affiliation with NBC on July 1, 2016; Nexstar was aware that NBC was unwilling to renew WHAG’s affiliation; Nexstar leveraged WHAG’s affiliation with NBC to induce DirecTV to agree to the Unlaunched Station Fee provision based on a misleading or materially incomplete representation that WHAG would continue its affiliation; Nextstar was aware DirecTV was acting on the basis of these misleading statements; DirecTV justifiably relied on Nexstar’s representations, even though Nexstar knew DirecTV did not have the capacity to launch or carry that Station; and DirecTV was damaged as a result. A material fact is one that goes to the “very essence of the bargain” ( Junius Const. Corp. v. Cohen , 257 N.Y. 393, 400 (1931)), and is one that is likely to influence a plaintiff’s decision-making ( Gulf Ins. Co. v. Transatlantic Reins. Co. , 69 A.D.3d 71, 96 (1st Dept. 2009); 2 Fifth Ave. Tenants Assn. v. Abrams , 183 A.D.2d 577, 578 (1st Dept. 1992) (stating that omitted material is important if the person viewing it would have seen it as significantly altering the total mix of available facts)). “A fact may not be dismissed as immaterial unless it is ‘so obviously unimportant ... that reasonable minds could not differ on the question of importance.” Swersky v. Dreyer & Traub , 219 A.D.2d 321, 328 (1st Dept. 1996), rearg denied , 232 A.D.2d 968 (1st Dept. 1996), appeal withdrawn , 89 N.Y.2d 983 (1997) (quoting Allen v. Westpoint-Pepperell, Inc. , 945 F.2d 40, 45 (2d Cir. 1991)). Materiality is normally an issue for the jury to determine. See Brunetti v. Musallam , 11 A.D.3d 280, 281 (1st Dept. 2004). When a claim for fraud is predicated upon an act of concealment or an omission, the plaintiff must establish the same elements for fraud and also show that the defendant had a duty to disclose material information but failed to do so. Gansett One, LLC v. Husch Blackwell, LLP , 168 AD3d 579, 579 (1st Dept. 2019) (citing Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 179 (2011). An affirmative duty of disclosure arises when the parties are in a confidential or fiduciary relationship. See Dembeck v. 220 Cent. Park S., LLC , 33 A.D.3d 491, 492 (1st Dept. 2006). Therefore, “ bsent a confidential or fiduciary relationship, there is no duty to disclose, and mere silence, without identifying some act of deception, does not constitute a concealment actionable as fraud.” FNF Touring LLC v. Transform Am. Corp. , 111 A.D.3d 401, 402 (1st Dept. 2013) (internal quotation marks and citation omitted). A misleading partial disclosure gives rise to a claim for fraud when a party is dependent upon the defendant for relevant facts, and “if the withheld facts are proven to have been material.” Juman v. Louise Wise Servs. , 254 A.D.2d 72, 74 <1st dept 1998> .) Indeed, “once a party has undertaken to mention a relevant fact to the other party it cannot only give half of the truth,” particularly where only a partial or ambiguous statement has been made. Brass v. American Film Tech., Inc. , 987 F.2d 142, 150 (2d Cir. 1993) (citing Junius , 257 N.Y. at 400; see also Restatement (Second) of Torts, § 529 (“ representation stating the truth so far as it goes but which the maker knows or believes to be materially misleading because of his failure to state additional or qualifying matter is a fraudulent misrepresentation”). “Under the special facts doctrine, a duty to disclose arises where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair.” Swersky , 219 A.D.2d at 327 (internal quotation marks and citations omitted). The party invoking the doctrine must demonstrate that “the material fact was information peculiarly within knowledge of ,” and “the information was not such that could have been discovered by through the exercise of ordinary intelligence.” Jana L. v. West 129th St. Realty Corp. , 22 A.D.3d 274, 278 (1st Dept. 2005) (internal quotation marks and citation omitted). Slip Op. at *2. Id. Id. Id. Id. Id. Id. at *2-*3. Id. at *3. Id. Id.

By: Jonathan H. Freiberger Sometimes this BLOG takes an in-depth look at recently decided cases from New York’s appellate courts; other times it simply reports on cases with an interesting holding. Today’s BLOG reflects the latter. Bank of New York Mellon v. Levinson , is a mortgage foreclosure action decided by the Appellate Division, Second Department, on August 14, 2024. The defendant/borrower in Bank of New York , borrowed $1.2 million from the lender and secured his repayment obligations with a mortgage on real property in Suffolk County. In 2007, upon the borrower’s default, the lender commenced a foreclosure action (the “First Foreclosure Action”). By the complaint in the First Foreclosure Action, the lender accelerated the loan balance due to it. [Eds. Note: this BLOG has addressed issues regarding acceleration of loans. See, e.g ., < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .] In 2016, the First Foreclosure Action was dismissed “on the ground that the lender lacked standing.” [Eds. Note: this BLOG has addressed standing in mortgage foreclosure actions. See, e.g., < here =">here"> , < here =">here"> and < here =">here"> .] In 2017, the lender commenced a new foreclosure action (the “Second Action”) against the borrower and the Homeowner’s Association to which the borrower (and the subject property) belonged (the “HOA”). The HOA’s motion to dismiss the Second Action as against it on statute of limitations grounds was denied. [Eds. Note: this BLOG has addressed statute of limitations issues in mortgage foreclosure actions. See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .] The lender then moved for “summary judgment on the complaint insofar as asserted against the borrower and related defendants, for leave to enter a default judgment against the nonanswering defendants, and for an order of reference.” The lender’s notice of motion, however, did not seek summary judgment as against the HOA. Nonetheless, the motion was granted, and a referee was appointed to calculate the amounts due to the lender. Thereafter, the HOA’s interest in the property was transferred to DH Group Holdings, Inc. The lender moved to confirm the referee’s report and for a judgment of foreclosure and sale. DH Group cross-moved for leave to intervene in the Second Action as a defendant and to renew the HOA’s motion to dismiss due to a change in the law. DH Group also opposed the lender’s motion to confirm and for a judgment of foreclosure and sale on the ground that summary judgment in the lender’s favor was never obtained against the HOA. The motion court permitted DH Group to intervene in the Second Foreclosure Action, but denied its motion to renew and granted the lender’s motion to confirm the referee’s report and for a judgment of foreclosure and sale. On DH Gorup’s appeal, the Second Department reversed because summary judgment was never obtained against the HOA and, in so doing, the Court stated: To be entitled to a judgment of foreclosure and sale against a defendant, a plaintiff must first establish entitlement to judgment against that defendant via a summary judgment motion or a motion for leave to enter a default judgment, or at trial ( see generally Christiana Trust v Rashid , 228 AD3d 822 , 824-825; MTGLQ Invs., L.P. v White , 179 AD3d 790 ). Here, the record demonstrates that the plaintiff neither sought nor obtained summary judgment or leave to enter a default judgment against the HOA, the intervenor's predecessor in interest, nor was a trial held against the HOA. The plaintiff's argument that the intervenor is not aggrieved by the order and judgment of foreclosure and sale is without merit, as the intervenor opposed the plaintiff's motion, inter alia, to confirm the referee's report and for a judgment of foreclosure and sale on this specific ground ( see Mixon v TBV, Inc. , 76 AD3d 144 , 156-157). The Court also determined that DH Group’s motion to renew was properly denied. The Court found that the “evidence demonstrated that the 2007 foreclosure action was dismissed based upon an expressed judicial determination that Countrywide lacked standing, and thus, the commencement of that action did not accelerate the mortgage note ( see CPLR 213<4> ; U.S. Bank N.A. v Marrero , 221 AD3d 631 , 632).” Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey Haber A multi-level marketing program is a relative of pyramid scheme. “ pyramid scheme is an illegal investment scam based on a hierarchical setup.” In the classic pyramid scheme, “participants attempt to make money solely by recruiting new participants, usually where: he promoter promises a high return in a short period of time; o genuine product or service is actually sold; and he primary emphasis is on recruiting new participants.” Promoters of a pyramid scheme often encourage investors to participate in the fraud through social media, company websites, group seminars, Internet advertising, YouTube videos, and other media. To lure recruits into the scheme, pyramid scheme promoters work hard to make the operation look legitimate. But, as discussed below, they are not and ultimately collapse because the promoter cannot raise enough money from new investors to pay earlier ones. A pyramid scheme begins with an individual or a company who recruits investors, typically by promising high rates of return. As the earliest investors in the pyramid, these individuals typically receive high returns. These gains are paid for, however, by new recruits, not by a return on any real investment. Because returns are dependent upon investment by new recruits, ultimately the pyramid becomes too big for new recruits to fund returns for those at the top of the pyramid. For this reason, it is mathematically impossible for every investor in the pyramid to make money. For example, if each investor needs to recruit 10 people to recoup his/her initial investment, the bottom levels of the pyramid would have to recruit over one billion people to break even – i.e., make back the money initially invested. See N.Y.="schemes).” See N.Y." AG,="AG," “Don’t="“Don’t" Get="Get" Caught="Caught" a="a" Pyramid="Pyramid" Scheme.” Here.=">Here."> As noted, a multi-level marketing program (“MLM”) and a pyramid scheme are cut from the same cloth. It is often difficult to tell the difference between a legitimate MLM and a pyramid scheme. Both share the same or similar business models of “multiple levels” of distributors and recruits. A legitimate MLM relies on a network of distributors and recruits who sell the company’s product. Think of companies like Amway, Tupperware, Herbalife, Avon, and Mary Kay. The only way to make money in a legitimate MLM is by selling the company’s product directly to the consumer or by managing a team of salespeople. Managers receive a percentage of the sales made by each recruit under their management and supervision. A legitimate MLM does not require the recruit to buy a starter kit from which the earlier investor receives a commission or a recruiting “bonus” or require mandatory training and a non-refundable membership fee. In short, a legitimate MLM does not require investors to recruit new ones to earn money; the business is focused on selling the company’s products. Stopping illegal MLMs and holding their promoters accountable is an important part of the SEC’s enforcement mission. In today’s post, this Blog looks at an SEC enforcement action against an MLM and its principals and promoters for bilking investors out of $650 million. On August 12, 2024, the SEC announced (here) charges against the principals of an MLM (the “Principals”), along with their company, NovaTech Ltd., for operating a fraudulent scheme that raised more than $650 million in crypto assets from more than 200,000 investors worldwide, including many in the Haitian-American community. The SEC also charged numerous individuals for their roles in promoting the MLM to investors. According to the SEC’s complaint (here), the Principals operated their company as a multi-level marketing and crypto asset investment program. The SEC alleged that from 2019 through 2023 defendants lured investors by claiming the company would invest their funds on crypto asset and foreign exchange markets. One of the Principals assured investors that their investments would be safe and promised that “n this program, you are in profit from day one, because again you have access to that capital.” In reality, the company used the majority of investor funds to make payments to existing investors and to pay commissions to promoters, using only a fraction of investor funds for trading. The SEC further alleged that the Principals siphoned millions of dollars of investor assets for themselves. When the company ultimately collapsed, most investors were not able to withdraw their investments, resulting in substantial losses, said the SEC. “NovaTech and the caused untold losses to tens of thousands of victims around the world,” said Eric Werner, Director of the SEC’s Fort Worth Regional Office. “As we allege, MLM schemes of this size require promoters to fuel them, and today’s action demonstrates that we will hold accountable not just the principal architects of these massive schemes, but also promoters who spread their fraud by unlawfully soliciting victims.” The SEC also alleged that the company’s top promoters each recruited a wide network of investors and promoters. The company paid them substantial commissions for the investors they and their networks recruited. According to the SEC, when the promoters became aware of certain red flags about the company, including regulatory actions taken against it by U.S. and Canadian regulators, they continued recruiting investors and downplayed the red flags. The SEC filed its complaint in the U.S. District Court for the Southern District of Florida, charging certain defendants with violating the antifraud provisions of the federal securities laws and all the defendants with registration violations. The SEC sought permanent injunctive relief, disgorgement of ill-gotten gains, and civil penalties. Without admitting or denying the allegations, one of the defendants agreed to partially settle the SEC’s charges by consenting to a $100,000 civil penalty and to be permanently enjoined from future violations of the charged provisions, with the amount of other monetary remedies to be determined at a later date. The partial settlement is subject to court approval. ____________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. See Investopedia.com, What Is a Pyramid Scheme? How Does It Work? (Updated June 3, 2024) (here). See Investor.gov, Pyramid Schemes (here).

By: Jeffrey M. Haber As readers of this Blog know, New York has a “long and strong public policy favoring arbitration … as a means of conserving the time and resources of the courts and the contracting parties.” For this reason, “New York courts interfere as little as possible with the freedom of consenting parties to submit disputes to arbitration.” The foregoing principle was at issue in McWhinney-St. Louis v. Cliftonlarsonallen LLP , 2024 N.Y. Slip Op 32747(U) (Sup. Ct., N.Y. County Aug. 6, 2024) ( here ). McWhinney-St. Louis arose from allegations of employment discrimination. Defendants argued that plaintiff’s claims were subject to arbitration pursuant to the parties’ employment agreement (the “Agreement”). The Agreement included a broad arbitration clause , requiring arbitration of: ny dispute arising under this Agreement, or arising out of the circumstances, terms, conditions or termination of relationship with or its officers, directors, members, employees, agents or independent contractors, and any claim by against any officer, director, member, employee, agent or independent contractor of for any damage or harm, including but not limited to claims arising under any state or federal employment or discrimination laws. “In deciding an application to compel arbitration pursuant to CPLR 7503 , the court is required to first make a determination whether the parties have entered into a valid arbitration agreement and, if so, whether the issue sought to be submitted to arbitration falls within the scope of that agreement.” The motion court found that the issue sought to be arbitrated fell within the scope of the Agreement because the allegations in the complaint concerned race discrimination and a hostile work environment in violation of the New York State and City Human Rights Laws. Although plaintiff’s claims fell within the scope of the parties’ agreement to arbitrate, plaintiff argued that the arbitration clause was unconscionable and therefore unenforceable. “A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made.” “Examples of procedural unconscionability include, but are certainly not limited to, high pressure commercial tactics, inequality of bargaining power, deceptive practices and language in the contract, and an imbalance in the understanding and acumen of the parties.” “ he substantive element looks to the content of the contract” to determine if any terms are unfair. Plaintiff argued that the Agreement was procedurally unconscionable because she did not have a choice in signing it when accepting the employment offer. The motion court rejected the argument, noting that an arbitration agreement being offered on a “‘take it or leave it’ basis … is not sufficient under New York law to render the provision procedurally unconscionable.” Thus, concluded the motion court, “ he employment contract … not procedurally unconscionable.” As for substantive unconscionability, plaintiff argued that the fee shifting and the forum selection clauses of the Agreement rendered the agreement to arbitrate unconscionable. The fee-shifting provision provided that in the event plaintiff brought an action against defendant, plaintiff “agree to reimburse for any attorneys’ fees, costs and expenses incurred” in connection with defendant’s successful defense of such action or proceeding. Noting that “there is nothing inherently unconscionable about a nonreciprocal attorney’s fee provision in a commercial contract,” the motion court held that plaintiff “should not be compelled to bear costs which would effectively preclude from pursuing claim.” Thus, the motion court enforced the Agreement by severing the fee-shifting provision from the Agreement, an approach the motion court said was “consistent with the state and federal policy favoring arbitration.” As such, the motion court concluded that severing the fee-shifting provision from the Agreement was “the appropriate remedy … rather than void the entire agreement.” The motion court also rejected plaintiff’s contention regarding the forum selection clause, which provided that any dispute would be governed by the laws of the State of Minnesota, and any arbitration or court action commenced by plaintiff would be exclusively conducted in the federal and state courts in Minnesota. The motion court held that the Agreement was enforceable because defendant had agreed to waive the provision. “Accordingly, as in Ragone ,” said the motion court, “‘New York law … allow for the enforcement of the arbitration agreement as modified by the defendants’ waivers.” Takeaway The threshold question in assessing whether to compel arbitration is whether there is a valid and binding agreement to arbitrate. If the court finds that a valid arbitration agreement exists, the next question to consider is whether the dispute comes within the scope of that agreement. In McWhinney-St. Louis , the parties’ agreement contained a broad arbitration provision that provided for the arbitration of “ ny dispute arising under this Agreement, or arising out of the circumstances, terms, conditions or termination of ” employment. As such, the motion court found that the arbitration agreement was enforceable. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Stark v. Molod Spitz DeSantis & Stark, P.C. , 9 N.Y.3d 59, 66 (2007). Id. CPLR § 7503(a) provides: “Where there is no substantial question whether a valid agreement was made or complied with, and the claim sought to be arbitrated is not barred by limitation under subdivision (b) of section 7502, the court shall direct the parties to arbitrate.” Edgewater Growth Capital Partners, L.P. v. Greenstar N. Am. Holdings, Inc. , 69 A.D.3d 439 (1st Dept. 2010). Slip Op. at *2. Gendot Assoc., Inc. v. Kaufold , 56 A.D.3d 421, 423 (2d Dept. 2008). Simar Holding Corp. v. GSC , 87 A.D.3d 688, 689-90 (2d Dept. 2011). Eichholz v. Panzer-Eichholz , 188 A.D.3d 820, 824 (2d Dept. 2020). Slip Op. at *3 (quoting Ragone v. Atl. Video at Manhattan Ctr. , 595 F.3d 115, 122 (2d Cir. 2010)). Id. Id. at *4 (quoting Lansco Corp. v. Kampeas , 87 A.D.3d 421, 422 (1st Dept. 2011) (internal quotation marks omitted). Id. (quoting Matter of Schreiber v. K-Sea Transp. Corp. , 9 N.Y.3d 331, 341 (2007) (internal quotation marks omitted) and citing Ragone , 595 F.3d at 120 (because “the defendants agreed to waive the … fee shifting provisions as set out in the arbitration agreement … these provisions do not render the arbitration agreement substantively unconscionable”)). Id. (quoting Brady v. Williams Capital Grp., L.P. , 64 A.D.3d 127, 137 (1st Dept. 2009)). Id. (quoting id. ). Id. at *4-*5. Id. at *5 (quoting Ragone , 595 F.3d at 124). Matter of Belzberg v. Verus Invs. Holdings Inc. , 21 N.Y.3d 626, 630 (2013). Zachariou v. Manios , 68 A.D.3d 539, 539 (1st Dept. 2009) (“Whether a dispute is arbitrable is generally an issue for the court to decide unless the parties clearly and unmistakably provide otherwise.”).

By Jonathan H. Freiberger As noted in prior BLOG articles, specific performance is an equitable remedy used to compel a party to perform under a contract. McGinnis v. Cowhey , 24 A.D.3d 629 (2 nd Dep’t 2005). The remedy is frequently used to enforce rights under a real estate contract, where monetary damages are typically insufficient to make the non-breaching party whole due to the uniqueness of real property. EMF General Contracting Corp. v. Bisbee , 6 A.D.3d 45 (1 st Dep’t 2004). This BLOG has discussed specific performance on numerous occasions. See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . In January of 2021, this BLOG < here =">here"> discussed W Equities Acquisitions, LLC v. Wyckoff Heights Properties, LLC , 190 A.D.3d 881 (2 nd Dep’t 2021). W Equities involved a real estate sales contract. The seller could not deliver the premises free of all tenancies due to two tenants that refused to execute surrender agreements despite generous financial and other incentives. This presented a “title defect” beyond the seller’s control. Consistent with the provisions of the contract, because title could not be delivered seller offered “ the choice of either accepting such title as the was able to convey, with a credit no greater than the maximum amount specified in the contract, or terminating the contract with a refund of the down payment and reimbursement of the net cost of title examination.” W. Equities , 190 A.D.3d at 882. Because the seller complied with the terms of the contract, the purchaser’s insistence on closing and its action for specific performance was unsuccessful. The Second Department, on August 7, 2024, decided Special Corp. v. 3RF, LLC. Special is an action much like W. Equities , and, accordingly, the Court relied heavily on W. Equities in rendering its decision. The plaintiff in Special entered into a contract to purchase a $3,000,000 building from the defendant and, upon signing, made a $200,000 down payment. Among other provisions, the contract provided that if the seller: shall be unable (as opposed to unwilling) to convey title to the Premises at the Closing in accordance with the provisions of this Agreement, Purchaser, nevertheless, may elect to accept such title as Seller may be able to convey without any credit against the monies payable at the Closing or liability on the part of Seller. If Purchaser shall not so elect, Purchaser may terminate this Agreement, which termination shall be subject to the provisions of §13.06. Seller shall not be required to bring any action or proceeding or to incur any expense in excess <$10,000> to cure any title defect. The contract also limited the purchaser’s remedies to the cancellation of the contract and the return of the down payment. The seller represented that accurate lease information regarding all tenants was provided to the purchaser and that it would deliver to the purchaser, lease modifications and estoppel letters from each tenant. One tenant refused to deliver the requested documents and, accordingly, the seller was unable to deliver to the purchaser clean title to the premises. It was also noted that a rider extending the term of the hold-out tenant’s tenancy, was not provided to the purchaser until after the execution of the contract. Relying on the undisclosed rider, the purchaser requested a reduction in the purchase price. The seller responded by offering three solutions to the purchaser: (1) a return of the security deposit and cancellation of the contract; (2) an offer to spend up to $10,000 to convince the holdout tenant to deliver the requested documents; or, (3) a $20,000 reduction of the purchase price. The purchaser viewed the seller’s inability to convey title as an “anticipatory breach” and threatened to commence an action for specific performance of the contract and seek an abatement of the purchase price. [Eds. Note: this BLOG has previously addressed anticipatory breach. See, e.g. , < here =">here"> and < here =">here"> . The seller viewed the purchaser’s rejection of the contract terms as a termination of the contract. The purchaser commenced an action for specific performance and an abatement of the purchase price. The seller, in its answer, asserted a counterclaim to retain the down payment. Thereafter, the motion court granted the seller’s motion for summary judgment and dismissed the purchaser’s complaint and awarded the seller judgment on its counterclaim. The Second Department affirmed. In dismissing the purchaser’s complaint, the Court stated that: the record reflects that, because the refused to accept title to the building with the title defects, and because the failed to agree to allow the to further negotiate with the holdout tenant, its sole remaining remedy pursuant to was to terminate the contract. Pursuant to , the only relief available to the upon termination of the contract was a return of its down payment. Contractually, the was not entitled to specific performance or an abatement in the contract price. Further, the Court found that the motion court properly granted summary judgment to the seller on its counterclaim because the seller “acted within its rights pursuant to , and it is the —not the —that breached the contract by failing to elect one of the remedies offered to it by the pursuant to .” Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.